The development of environment is
an important part of the ecosystem functioning as a buffer to the life
of all living beings. The development of the environment shall be directed
towards bringing about continuity of environment functions in a dynamic
balance and harmony with the population growth for ensuring sustainable
national development. The development of the environment shall be aimed
at improving quality and at utilizing the natural resources in a sustainable
way, at rehabilitating environmental damages, and at controlling pollution
and promoting the quality of environment.

The objectives in the development
of environment during REPELITA VI are, among others, for improving the
identification of the number and size of natural resources and the environmental
functions, identification of damage levels, its utilization, and possible
development, maintaining the natural resources and environmental functions;
maintaining conservation areas and protected forests, biodiversity, DAS
(river basin) areas, coral reefs, and mangroves ecosystem forests; establishing
a more efficient and effective institutional system of environment; the
control of air and water pollution, caused by developmental activities
or by people's way of living; pollution control of 101 most important rivers
all over Indonesia, which have been heavily polluted; control of coast
damages and the maintenance of quality and function of coastal areas; and
recovering production potentials of critical soil in at least 39 DASes.

In order to reach these objectives,
certain policy measures shall be adopted. The portfolio requires that the
selection of location for development is always be based on the capability
of the environment to support the development. Other policy measures include
the efforts to reduce industrial hazardous wastes the efforts for managing
the waste and adequate control of pollution, efforts in determining environmental
quality standard; efforts in conservation and rehabilitation of natural
resources and the environment; and effort in developing institutions, people's
participation, and capability of human resources in managing the environment.

ENVIRONMENTAL OBJECTIVES IN REPELITA
VI

Environmental Objectives play
a key role in REPELITA VI. The Plan targets improvements in the management
of natural resources and minimization of pollution as key objectives.
Achieving these goals will entail a three-pronged approach focusing on
policy, investment and institutions. Successful environmental and natural
resource management depends on maximizing the links, between sound economic
policies and sound environmental outcomes. In particular this entails taking
full advantage of "win-win-win" pricing policies that reflect the true
value of fuels and energy, forests, water, and land to the country. But
moving to market prices is not sufficient in many cases, such as clean
air and water. Here it will be necessary to use a mix of regulatory policies
and market-based policies such as pollution charges to limit environmental
degradation. These policies will encourage private investment in pollution
control. In the public sector, investments in reducing congestion, and
in water, sewage treatment, and sanitation will be key factors in maintaining
a healthy urban environment. Finally, achieving REPELITA VI's environmental
goals will entail improvements in the design, scope and effectiveness of
institutions charged with meeting those goals, coupled with information
campaigns to enlist the support of the public in the sound management of
the environment.

REPELITA VI and the Second 25 Year
Long-Term Development Plan aim to improve natural resource management
and minimize pollution. Problems of natural resource management
are the sustainability of forestry and potential declines in oil &
natural gas reserves, with water basin and aquifer management becoming
important issues. The highest priority pollution problems are water
supply and sanitation, vehicle emissions, and industrial pollution in the
main urban centers.

Better use of incentives, in particular
pricing that more closely reflects the true value of resources and the
costs of activities to the environment, would encourage more efficient
use of resources, less damage to the environment, and more fiscal revenues,
a so-called "win-win-win " solution. A good example is the 1993
increase in petroleum prices. Other important areas where higher prices
would generate win-win-win solutions are, first and foremost, forestry
royalties and stumpage fees (with revenues brought into the budget),
but also electricity and fertilizer prices. In addition, there is
considerable scope for increasing water charges and effluent fees,
although these measures would have to be complemented with institutional
developments that discouraged tapping of aquifers and self-disposal that
would harm water resources. Fees for parking or access to congested urban
zones could reduce bottle-necks and associated vehicle pollution.

Investment will also be necessary
to reduce pollution. Massive public investments will be needed to limit
urban congestion and realize REPELITA VI's ambitious targets for delivery
of safe water (from 50% to 75% of the population) and sanitation (from
25% to 54% of the population). A key issue will be implementation of the
investment plan; over the last five years, investments in urban water and
sanitation fell significantly short of targets. Effectiveness of service
delivery could also be improved by greater reliance on contracts with the
private sector for construction and management of systems. In addition,
private investments will be needed to reduce the enormous projected increase
in industrial pollutants that otherwise would accompany the projected industrial
growth. Adjustments in investments need to begin now, because 85% of the
projected increase in pollution over the PJP II would come as a result
of growth, not existing production. A mixture of pollution charges, regulation,
and development of institutional enforcement capacity will be needed to
encourage these private investments.

Institutional development also
will play a major role in improving management of natural resources and
reaching the Plan's environmental goals. In the area of natural resource
management, institutional development will be critical to enforcement of
higher charges for logging and water/sanitation. In the area of oil and
gas, a decision will be needed soon on whether what adjustment, if any,
would be desirable in contract terms, given the long lead times for development
of fields, the projected decline in net oil & gas exports, and the
projected trends in world oil prices. Institutional development also will
be needed to limit the growth of pollution, by strengthening the capacity
of the local governments, which will increasingly implement urban infrastructure
investments, and the institutions charged with monitoring and enforcing
environmental standards. A final, important institutional element will
be to build a public consensus in favor of environmental protection, particularly
in the business community, and to provide public information about environmental
problems and solutions.

NATURAL RESOURCES AND THE ENVIRONMENT
IN REPELITA VI

Environmental quality and sustainability
are an integral part of the Indonesian Government's development concerns.
As REPELITA VI states: "Environmental values influence all of the desirable
development activities of the Second 25 Year Plan.'

The growing attention to these issues
in the Government's development strategy reflects an increased awareness
of the costs and risks of the worsening environmental conditions due to
past growth, and potential for continued environmental degradation in the
future. Past growth was heavily dependent on natural resources--oil, gas
and forest products. Although the Government has successfully reduced that
dependence, the sustainable management of natural resources and the environment
remains a major challenge.

The environment provides two key functions
in support of economic activity. First, it is a source of natural resources,
both renewable and non-renewable, for use in production. Natural resources
must be managed over time, in light of opportunities for trade, to maximize
sustainable growth. Second, the environment must absorb waste products
created during the production of goods and services. The environment's
capacity is limited and use of that capacity must be explicitly managed
because externalities and poorly defined property rights make leaving such
management to the market an incomplete solution. For both natural resources
and the environment, efficiency and sustainability could be enhanced by
greater reliance on fees that reflect the economic costs and benefits of
resources (so-called win-win policies because they simultaneously improve
environmental and economic outcomes). Improvements in incentives will need
to be coupled with institutional improvements, particularly in forest,
land and marine fishery management.

Unless existing policies and practices
are changed, analysis of current environmental conditions and the likely
impact of future growth and development indicates that three main problems
will emerge that will threaten overall GDP growth and equity in REPELITA
VI and the Long-Term Development Plan.

First, future growth and
development, including the process of industrialization, would increasingly
strain Indonesia's stock of key natural resources (land, forests, water
and energy) and the sustainability of critical ecosystems (including groundwater
aquifers in cities, and watersheds and coastal and marine ecosystems throughout
Indonesia). This would occur despite the shift away from growth based directly
on natural resources. Moreover, inefficiencies in the allocation and use
of natural resources and the prospects for, continued degradation of critical
ecosystems, call into question the sustainability of even current levels
of economic activity in a number of key sectors.

Second, pollution from industrial
and urban sources (human waste, solid waste and vehicle emissions),
already poses a threat to health and welfare. This threat would increase
because of the concentration of industry in cities. Moreover, continued
growth of congestion and pollution in Indonesia's main cities would erode
the efficiency of public and private sector investment, reduce Indonesia's
ability to attract foreign investment, and could lead to strong community
resistance to industrial expansion, again with serious implications for
overall growth.

Third, the poor are particularly
vulnerable to growing pollution and the erosion of natural resources.
Lacking the resources to protect themselves, they would bear the brunt
of polluted water and air in the cities and the falling productivity of
marginal lands in the country side. The poor would also contribute to environmental
degradation through unsustainable production practices and the unsafe disposal
of human and other wastes. Dealing with these environment-related issues
of equity will become increasingly important in the coming years.

The potential consequences of these
issues have led to a growing awareness in Indonesia of the need to improve
the management of natural resources, reduce the level of urban and industrial
pollution, and enhance equity in the outcomes of future growth and development.
This will require continued improvements in the policies and incentives
for environmentally responsible behavior, a substantial increase in investments
in environmental protection by both the Government and the private sector,
and sustained efforts to strengthen the institutions responsible for environmental
planning and management.

THE ROLE OF NATURAL RESOURCES IN
DEVELOPMENT GROWTH

The Changing Reliance on Primary
Commodities. Indonesia has the good fortune to own vast and varied
natural resources: the world's second largest expanse of tropical forest,
fertile soil, teeming seas, prolific oil and gas deposits, and generous
amounts of coal, tin, copper and gold. These resources significantly contributed
to GDP growth during the First 25-Year Plan. At the start of that Plan
in 1970, the value added in the production and exploitation of primary
commodities represented about 60% of total GDP: in minerals (primarily
oil) 27%; in agriculture (food and other crops, plus livestock), 28%; and
in fishing and forest resources another 5%. The first-stage processing
of basic commodities (logs into sawn wood, hides into leather, etc.) represented
only about 4% of GDP, and further downstream processing (sawn wood into
furniture, leather into shoes) less than 2%. The export of primary commodities
accounted for 94% of total foreign exchange revenues. Two-thirds of the
labor force was employed in the primary sectors.

This picture has changed significantly
in the last 25 years, in both relative and absolute terms, with significant
implications for the environment. The share of value added from primary
commodities in total GDP has declined markedly: from 60% in 1970, to 39%
today. Primary exports declined from 94% of the total in 1970 to about
60% today. Employment in the primary commodity sector has fallen from 65%
to less than 55%. These trends will continue. In absolute terms, however,
the value added of primary commodities has more than doubled over the past
twenty years--from Rp21,300 billion in 1970 to Rp44,300 billion in 1990
(in constant 1983 prices)--with "exhaustible" resources (oil, LNG and other
minerals) up by 128%, and "renewable resources (agriculture, fishing and
forestry) up by 91%. While these sectors will grow more slowly over the
next two decades, their total value added is likely to increase by a further
50% by the year 2010. Similarly, commodity exports have increased by 130%
over the past twenty years, and are likely to increase in the medium term,
particularly if deregulation proceeds in agriculture.

Proper Accounting for Natural Resources.
Annual value added from natural resources is only a part of the picture
linking growth and natural resources. One must also pay attention to the
stock of natural resources. For a level of GDP to be sustainable, at a
minimum the capital used up in generating that GDP growth must be replaced.
This means investment must at least equal both the depreciation of man-made
capital (broadly defined to include human capital) and the depletion of
natural capital. If not, a country is consuming its capital. When the stock
is gone, GDP must collapse. For growth in GDP, the growth in investment
in both forms of capital must exceed their depreciation.

Traditionally, national accounts have
only dealt with this problem in terms of manmade capital. Statisticians
created the concept of Net Domestic Product (NDP), which nets depreciation
from investment and GDP. Clearly, if net investment is negative the capital
base is eroding and NDP will decline.

Where natural resources are a key
contributor to growth, changes in the stock of natural resources must a]so
be tallied. If depletion of natural resources is not properly reflected
in national accounts, the sustainable growth rate may be overestimated.
This is because current income (annual GDP or NDP) can reflect profits
made from using up stocks of resources that may be either non-renewable
or being used at a rate greater than is sustainable or renewed.

Measuring natural resource stocks
requires measuring the physical additions to those stocks through natural
growth, as in the case of forests, or through new discoveries, as in the
case of oil. Physical reductions must also be recorded, chiefly as depletion
as the stock is used up in production. Depletion is the natural resource
equivalent of depreciation.

As is readily apparent, the physical
stocks of Indonesian natural resources has declined since the 1970. For
tropical timber the decline is roughly 0.8% per annum, while for oil it
is 0.69%. Most of the tropical timber decline has been related to conversion
of forest into estate crop plantation. The figure rises to 2% for oil if
one uses the peak 1975 reserve stock as a base. The 1975 oil reserve figure
is higher for two reasons. First, for oil and gas the estimate of reserves
is not absolute physical reserves but proven reserves (usually about 25
% of physical reserves). Proven reserves are those amounts of oil and gas
economically recoverable at existing prices. Given this definition, increases
in prices such as the first oil shock, by increasing what could be spent
to recover oil and gas, increase the amount of proven reserves. Second,
higher prices and profits encourage higher investments in exploration that,
when successful, increase proven reserves.

In combining different natural resources
to derive a natural capital stock, one needs to value the physical stocks.
In principle, the economic value of a natural resource is the revenue that
accrues from its exploitation less the minimum cost required to cover returns
to all the factors of production used in exploiting the resource. For a
resource like oil or gas, it is feasible to estimate its value as the difference
between the market price of the resource, and the cost of actually exploiting
it. This value is often called the resource's economic rent.

One difficulty faced in valuing forests
(or other resources) is the existence of values other than the simple economic
ones: amenity value (such as the non-destructive recreational use
of forests); option value (the retention of a natural resource in
expectation of an as yet undiscovered benefit--the commonly heard argument
for biodiversity and gene pool conservation in forests is an example);
and existence value (the psychological or spiritual value society
derives from the existence of a natural resource, aside from any physical
use of it). Many forests, in Indonesia and elsewhere, have spiritual or
sacred value to society, especially to indigenous traditional forest dwelling
or adjacent groups.

Indonesia's forests also provide economic
benefits external to the holders of the resource, such as soil and water
effects, in watersheds and downstream. Tropical forests also have an enormous
capacity to store carbon, and to re-absorb it when in a regenerating state,
and this has implications for global climate change. Were these benefits
to be valued, they would come out to be highly significant--possibly as
significant as the timber values of the resource. Some of these benefits,
e.g., carbon sequestering, are global rather than national in nature.

Even with this admittedly poor method,
the value of timber is extremely large when compare to oil and gas, the
natural resources that have figured most prominently in many discussions
of Indonesia's economy. This higher value of forests, compared to oil and
gas, underscores the need for closer attention to forestry management.
This is especially true given the renewable nature of forests when compared
to oil and gas.

Oil and gas figure more significantly
in measured GDP, and for these resources, as noted above, it is feasible
to value the resource stock by subtracting extraction costs from market
prices. Doing so reveals that the value of Indonesia's oil stock has declined
since the early 1980s, as international prices, and hence economic rents,
have fallen.

Looking ahead, the declining or stagnant
trends in the value of timber, oil and gas stocks have important implications
for sustainable growth. If one adopts the view that sustainability allows
for substitution of manmade for natural capital, then rates of manmade
capital accumulation will need to increase to offset the declines in natural
resource stocks. The rate of decline in physical resources of renewable
resources like timber will need to be brought in line with sustainability.
Failing to do so endangers the roughly US$4.5 billion in exports and US$8
billion in income that forestry contributes to the economy each year. Indonesia's
readiness to adhere the green labeling requirements will be important
in combining continued export revenues with sustainable management. With
non-renewable resources, eliminating declining physical stocks of oil and
gas is not a long-run option. Nonetheless, increased exploration expenditures,
and the new discoveries that will flow from them, could increase the stocks
of proven reserves and hence maintain production levels and GDP.